Trump’s tariffs set to make history and break a system MAGA loathes

Nearly 100 years ago, the US enacted a tariff law that set off a global trade war and prolonged and deepened the Great Depression.

Now President Donald Trump is betting the world has changed enough that history won't repeat itself.

He is set this week to impose so-called reciprocal tariffs and other levies on what he has labeled "Liberation Day" — a move expected to cover a broader swath of trade than the infamous 1930 Smoot-Hawley duties that have long served as a cautionary tale about protectionism. It's part of Trump's wider project to dismantle the global trading system the US helped build out of that era's wreckage, on his belief that Americans got a raw deal.

"The world has been ripping off the United States for the last 40 years and more. And all we're doing is being fair," Trump said in a weekend interview with NBC News.

Important details — the level of the tariffs, their duration, any exemptions for countries or sectors — were still being debated inside the White House in recent days. All depend on the proclivities of a notoriously unpredictable Trump, who is set to use a Rose Garden press conference Wednesday to launch the new duties.

Financial markets are already rattled and officials in world capitals fear the policies could spark a US recession and a global slowdown.

Christine Lagarde, president of the European Central Bank, privately warned European Union leaders at a recent meeting in Brussels that they needed to prepare for a worst-case scenario in which a hostile US drags the world into a destructive economic conflict, according to people familiar with the closed-door discussions.

In Canada, which has had a trade agreement with the US since the late 1980s, policymakers are working to reorient a resource-heavy economy that sends three-quarters of its exports to its immediate southern neighbor.

"The old relationship we had with the United States, based on deepening integration of our economies and tight security and military cooperation, is over," Prime Minister Mark Carney declared last week.

Trump's agenda has also divided corporate America. The US Chamber of Commerce has warned that small businesses will be hit especially hard. Even Tesla Inc. — whose Chief Executive Officer Elon Musk is publicly backing Trump's bull-in-a-china-shop style — has urged caution. But steelmakers and some iconic consumer brands have cheered the prospect of higher US tariffs as they complain of an unfair influx of imports.

In erecting a tariff wall around the world's largest economy, Trump is delivering on a campaign promise and attempting to drum up revenues to offset tax cuts he aims to push through Congress this year. However it ends up, it will put his stamp on economic history.

"This is going to be much bigger than Smoot-Hawley," says Douglas Irwin, an economic historian at Dartmouth College, who points to both the expected leap in tariff rates and the amount of trade covered as likely to eclipse what happened in 1930. "Imports are a much greater share of GDP now than they were back in the early 1930s by a long shot." Imports of goods and services are 14% of US gross domestic product — about triple the share they accounted for in 1930.

An analysis by Bloomberg Economics found that a maximalist approach could add up to 28 percentage points to the average US tariff rate — resulting in a hit of 4% to US GDP and lifting prices by close to 2.5% over a two- to three-year period. This would be equivalent to lopping more than $1 trillion off US output, or roughly the GDP of Pennsylvania. For comparison, this would be nearly as bad as the impact of the global financial crisis — which left the economy roughly 6% smaller after 3 years than its pre-crisis trend.

Trump's vocal concerns about value-added tax in Europe and non-tariff barriers in China mean they could face a major tariff shock, and potentially lose much of their exports to the US, Bloomberg Economics found. But because a limited share of GDP is exposed, the economic hit would likely be manageable. Canada and countries in Southeast Asia would likely feel a bigger disruption.

The Bloomberg Economics forecast assumes retaliation by other countries in the form of tariffs on US imports. It doesn't capture indirect economic costs of the policies, such as how uncertainty about the future might lead companies to shelve investment plans and consumers to put off purchases.

The Trump administration has pushed back on warnings that tariffs could sink the economy and hailed almost $2 trillion in investment announcements that they insist prove the tariffs are already drawing manufacturing back to the US. It's unclear just how many of those long-term investments will really materialize, or how many new jobs will come.

Attracting Investment

"Tariffs will make America more competitive. They will incentivize investment into America," Stephen Miran, chair of the White House Council of Economic Advisers, said in a March 19 interview with Bloomberg News in which he also pointed to the revenues they will raise. Other senior officials have said the new duties will raise $700 billion or more for federal coffers.

Besides the 25% auto tariffs that went into effect last week, Trump has already imposed 25% tariffs on many imports from Canada and Mexico, which he says are aimed at getting them to crack down on migration and the smuggling of fentanyl into the US. China has similarly been hit with 20% duties for not doing enough to stop exports of fentanyl precursors to Mexico, Canada and the US.

Trump has also put global tariffs on imports of steel and aluminum and promised more to come on copper and pharmaceuticals.

But none of those are likely to come close to the so-called reciprocal tariffs in terms of the value of imports covered. The new duties are meant to synthesize in one number — a tariff rate — all the trade barriers US exports face in other economies, including factors such as taxes or environmental and safety regulations.

A particular target of Trump's ire has been the use of value-added taxes by European countries and others, which their exporters are allowed to rebate. The plans have evolved in recent weeks since Trump pivoted away from his campaign idea for a universal tariff, which would have applied a much simpler flat rate of 10% to 20%, for instance, on all US imports.

There's been no public dissent among key Trump administration officials. But there have been signals of ongoing wrangling. One aide has publicly referred to "negotiations" internally. and over the weekend, Kevin Hassett, head of Trump's National Economic Council, made clear the details still hadn't been decided. "The president has got a heck of a lot of analysis before him, and he's going to make the right choice, I'm sure,"

Americans appear skeptical that tariffs will bolster the economy and are fretting over higher prices: Consumer sentiment in March slumped to the lowest level in more than two years and long-term inflation expectations jumped to a 32-year high. Trump officials have sought to ease voter concerns, arguing the promise of a bigger economic transformation will be worth the price of any pain.

Trump said in a weekend interview that he "couldn't care less" if foreign automakers raise prices in response to the tariffs because "people are going to start buying American cars."

'Forget' GATT

Since the end of World War II, the US has led the way in a push to reduce tariffs and embraced what is known as the "most-favored nation" concept, which since the 1947 signing of the General Agreement on Tariffs and Trade has applied carefully negotiated duty rates to thousands of often mind-numbingly specific product lines. The system made the lowest duty available to all members of first the GATT and then its successor, the World Trade Organization.

"What this does is say, 'Forget the GATT. Forget the WTO. We're just going to establish our own set of rules bilaterally with each country,'" says Michael Froman, president of the Council on Foreign Relations and the US's top trade negotiator during the Obama administration.

The Trump administration's stated aim is to reduce global imbalances that are now a widely recognized source of tension. In the best case, its approach might lead to a series of US deals lowering trade barriers around the world, Froman said. And there are signs the EU and others have begun drafting concessions in the hopes of getting Trump to at least soften his tariffs.

Yet "the biggest risk in my view is that it leads to an escalation of trade barriers and that affects growth" as well as inflation, productivity and competitiveness, Froman said. "And that we see a shrinking pie including for the US rather than the benefits of a growing global economy."

Plus, Trump's tariffs appear to have no bounds, says Mary Lovely, a senior fellow at the Peterson Institute for International Economics.

"If you think that the US needs protection on all manufactured goods, then pretty soon the only thing you're not protecting are things that we don't produce," she says. "But these guys seem to want to produce everything."

Uncertainty Delays

Businesses are racing to adapt and trying to game out what's to come, which for many means hitting the pause button on even small decisions. At DataDocks, which helps companies like PepsiCo Inc. and and Stitch Fix Inc. coordinate traffic at factory and warehouse loading docks, bookings for the month of April are down 35% from the year before.

More worryingly to Nick Rakovsky, DataDocks's founder, companies that would normally plan deliveries well into the summer months aren't booking any beyond the first half of April. That, he says, is a "behavior that is consistent with the uncertainty we've seen in the past" during the Covid-19 supply chain turmoil.

In 2019, during Trump's first trade war, the Federal Reserve found the impact of uncertainty in slowing investment and hiring was larger than the direct effect of duties. This time around, uncertainty has spiked above levels seen at that time. And it's showing up in official forecasts.

The Fed in March lowered its forecast for annual growth by the most since 2022 when they cut this year's forecast to 1.7% from 2.1%. That came before this week's tariffs and shortly after the OECD warned Trump's trade policies would slow global growth and send prices higher.

"This is the most dramatic shift in confidence that I can recall, except for when Covid hit," Neel Kashkari, the Minneapolis Fed president since 2016, said last week. "It's conceivable that the hit to confidence could have a bigger effect than the tariffs themselves."

Others have compared the potential risks developing to the stagflation of the 1970s oil shock or the uncertainty that came with the 2008 financial crisis. Former Bank of Japan policy board member Sayuri Shirai, worries that, unlike in recent downturns, the presence of simmering inflation — which is likely to be further stoked by tariffs — will limit how central banks can respond this time.

All of this has left Wall Street twitchy, with the S&P 500 in March entering correction territory as economists from Goldman Sachs Group Inc., JPMorgan Chase & Co. and other major investment houses slashed US growth forecasts. The concerns continued to affect global financial markets Monday, with US equities closing their worst quarter compared to the rest of the world since 2009 and Japan's Nikkei 225 ending the day down about 4%.

"It is hard to fathom, but we are back on recession watch," Mark Zandi, chief economist at Moody's Analytics wrote in a recent note.

As recently as January, when the US was expected to outperform the rest of the world thanks to robust consumer spending and a strong job market, and even hope for what many saw as Trump's pro-business agenda. But the tariff onslaught has changed the landscape.

Economists' Concern

"Many countries have tried to grow behind big tariff barriers and it just doesn't work," says Simon Johnson of the Massachusetts Institute of Technology, a former International Monetary Fund chief economist and a winner of the Nobel Prize in Economics. "Protectionism is not a good strategy and we have seen that many times in world history."

While US CEOs once broadly welcomed Trump's promises of tax cuts and deregulation, they are increasingly warning of the dangers of protectionism and of any hit to consumer confidence.

Yet some companies have embraced Trump's attack on foreign trade barriers.

In a March 11 letter to US trade officials, the JM Smucker Co. complained about an imbalance: US tariffs on imported jams sit below 2%, while the EU's effective duties are 37%.

The difference led to European jam makers exporting almost $240 million in jam, marmalade and other spreads to the US in 2024 versus the $295,614 in US products sent in the other direction, the company said. The letter declared that the EU tariffs on such products "harm American farmers, producers and workers."

On the other hand, Tesla executives wrote in a recent letter to US trade officials that new tariffs risked hurting not just the automaker, but overall American competitiveness, by raising the cost of manufacturing in the US.

Trump last week said he had not discussed tariffs with Musk, calling that a potential conflict of interest.

Tesla has faced a consumer backlash and there are signs that boycotts of American products are spreading. After the Smoot-Hawley tariffs were launched, European and other trading partners imposed their own duties on US exports, including Ford automobiles and other US-made cars, as economist Kris James Mitchener and co-authors documented in a 2021 paper. The US tariffs also provoked Italian auto clubs and others around the world to lead boycotts of American cars.

This time around, says Irwin, US companies may face more of the same. Already, stores in Canada have taken US whiskey and other products off the shelves.

Irwin notes Trump's trade grievances echo back to the US's earliest days, when founding fathers Thomas Jefferson and Alexander Hamilton each railed against imports and embraced tariffs. "We've always had something in America's DNA about unfair trade practices," he says.\

— With assistance from Alberto Nardelli, Derek Decloet, Josh Wingrove, and Rita Nazareth

Disclaimer: This article first appeared on Bloomberg and is published by a special syndication arrangement.